Institutional investors grow to appreciate wine, art

By IBT Staff Reporter11/13/09 AT 10:09 PM

Funds specializing in niche assets such as art and wine, long the preserve of ultra-rich hobbyists, are seeing a spike in interest from more mainstream investors seeking an antidote to the complexity of hedge funds.

As economies recover, interest has revived among traditional wealthy clients, but managers also tell of growing interest from institutions who have tended to avoided such illiquid assets.. Some have become confident enough in the trend to launch new funds.

Attitudes are starting to change and we're talking to large institutions which have the ability to write some large, meaningful cheques, said Geordie Manolas, managing director at First State Media Group, which runs a fund that invests in music publishing rights and recently bought the catalog of singer Sheryl Crow.

Solid returns throughout the crisis as other asset classes crashed, and a lengthening track record for some funds, are translating into increased acceptance among investors, though figures are difficult to come by.

Investing in art has precedents for institutions: the British Rail Pension Fund achieved 11 percent annualized returns on art assets from the late 1970s until the late 1990s, but most existing funds are less than 10 years old.

The Fine Art Group, established in 2001, recently bought a work by David Hockney for around $850,000 and has notched up an average annualized return on assets sold at its funds of 30 percent.

On the back of this, institutional investors now make up around 20 percent of the assets and the group is targeting $100 million for a new venture by year-end, according to Philip Hoffman, chief executive.

The institutions wanted to see a five-year track record and properly structured teams, he said, adding that money invested in art funds would be around $350 million by year-end, up from around $200 million at the beginning of the year.

Another relative veteran investing in fine wines, The Wine Investment Fund which dates back to 2003, paid out an annualized return of 13 percent in the five years to August 2009.

Andrew della Casa, director and co-founder of The Wine Investment Fund, said the proportion of institutional investors in the fund is around one-third and rising.

The trend marks a significant shift in attitude. A common perk offered by art funds is to loan paintings, sometimes valued in millions, to investors to hang in their homes - a feature frowned upon by cost-conscious institutions unhappy with additional insurance charges.

HEDGE FUND BACKLASH

The performance of some of the funds contrasts with that of hedge fund industry which suffered its worst year on record in 2008, when the average hedge fund lost 20 percent.

Bernard Duffy, managing director at Emotional Assets Management and Research said the sector is also benefiting from a backlash against hedge funds' sometimes impenetrable complexity.

These are tangible assets. You can touch them, you can feel them, he said.

Duffy's firm launched a fund this week that will invest in 15 different categories of collectibles including art, antique watches, stamps coins and rare books.

It will start buying assets when it raises 15 million pounds and cites expressions of interest from more than 10 private banks and a number of ultra rich individuals.

The sector still faces hurdles to sustain the growth in institutional interest and a lack of transparency and disclosure associated with purchases through private arrangement, as well as conflicts of interest between funds and their independent advisers -- often art dealers in their own right -- can be a turn off for non-specialists.

Transparency is not a strong point with these funds, said Pierre Valentin, a partner and specialist in art and cultural assets at law firm Withers. Such assets can also be impossible to benchmark, also dissuading the more cautious investor.

Many conventional investment managers remain unimpressed as the sector seeks to tap into new funding streams.

We watch with amused interest, said Paul Farrant, a director at London private client investment manager JM Finn.